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Hi, Chris:
>Maybe this is too simplistic, but I think of MM in terms of 2
separate components, position sizing & trailing stop-based
exits.>
MM tells you how much to invest. Itreally
has little to do with trailing stops. The latter is part of system development.
Your initial risk is determined by your hard stop placed at the beginning of the
trade. But the trailing stop, if you use one at all, is not considered partof
MM per se.
>Position sizing:- # of
shares= the minimum of [available $equity/$price OR
$risk/$volatility]
Position sizing in Amibroker is expressed in
terms of dollars, not No. of shares. But, if you want to speak in terms of No.
of shares, then position sizing is determined by $risk/$volatility, not
$equity/$price. The latter is only the amount of capital you allocateto a
given trade. It is only indirectly related to risk, which is defined as the
amount of money you are willing to lose on a trade. Certainly you are not
willing to risk your current equity divided by the price of the stock, which
would be 5, 10, or 15 times the amount you are actually putting at risk.
>- $volatility is stock specific (ie. exponential moving average of
triple the 15-day ATR… related to trailing stops below)
Correct, although it can be anything you want,
not necessarily 3 ATR(15). It could be 1 ATR, 2 ATR, etc. It's up to
you.
<FONT
face="Times New Roman">>-
$risk is a function of two parameters: %risk per trade (2%) and total risk
of current equity (10%)
When you speak of total risk being not >
10% of equity, you are saying that you are willing to put at risk (lose) 10% of
your current equity at any given time, which equates to only 5 stocks if your
risk is 2% (or 10 stocks if your risk tolerance is 1%). Another term
for total risk is portfolio heat. For a good discussion of portfolio heat,
go to <A
href="">www.galtcapital.com/Publications/betsize.pdf.
The latter article states that the optimum portfolio
heat to carry is ~25%. I'm not advocating this by any means, but that's what
they found in their research.<FONT
face="Times New Roman"><FONT
face="Times New Roman">
<FONT
face="Times New Roman">- total current risk on open trades =the
minimum of [zero, or ENTRY PRICE – CURRENT STOP across all open trades]… in
otherwords, if the trailing stop is above the entry price on any given
open trade (for long trades), the risk is zero. Short trades work
the same way in the other direction.
Yes. If your trade has enough profit init
that your stop is above your entry price, you have no risk (except, of course,
if the company overnight announces bankruptcy and the stock plummets to 0 before
you wake up!!). <FONT
face="Times New Roman">
<FONT
face="Times New Roman">Trailing stops:- set a trailing stop that
is the EMA of triple the 15-day Average True Range, or any other $-based
volatility measureyou're comfortable with (like standard deviation
bands)- Note that this is just a risk stop… trades might be exited
earlier depending on your particular system.
You can set your stoploss at anything you
want. It does not have to be 3ATR. As I indicated in an earlier post, Dennis
Ullom uses very tight stops (<1$), which means that if his stoploss is 2% of
equity, he can take a huge position in the stock, if that's your style.
<FONT
face="Times New Roman">
>In practice a system with these
parameters will usually result in an average of 5 open trades (10/2)
assuming you have enough equity to take the trades as they come. Also,
the more volatile the stocks you track, the smaller the position sizes will
be so the more open trades you might have at one time. This system
also works better with stocks that are relatively uncorrelated with each
other to ensure you're always in the market, which is why I think
commoditytraders use this type of system. >
Correct. The higher the volatility, the
smaller the position size because you are dividing your risk by a larger number.
The challenge with AmiBroker is figuring out:1) how to
calculate the total current risk given all open trades and the currently
available equity, which I think can be coded using the equity & ATC
functions but I haven't figured it out yet(I'm still digesting Herman'sATC
tutorial!)2) which trades to take when you get lots of buy signals at the
same time You cannot calculate total
current portfolio risk with the current version of AB because a portfolio is
assumed to be comprised of one stock. Stay tuned as TJ eventually will release
the MM version of AB.
>The rest of the system is "just" the entry rules, which thisforum
is REALLY good at. In general I find that implementing these kinds of
MM rules will definitely decrease the overall %return in backtesting, but I
think the underlying objective is to make any given system much more robust
by eliminating as much risk as possible. I'd really like to hear
feedback & see if anyone is interested in trying to figure out the afl
code to implement it.Partially true.
However, you can substantially increase your profitability if you partake in
innovative MM techniques, such as risking the market's money in addition toyour
own.
Al
Venosa
<FONT
face="Times New Roman">--- In amibroker@xxxx, "Avcinci"
<avcinci@xxxx> wrote:> I told myself I would not continue this
discussion any more, but I just gotta respond. Mark is 100% correct, Herman.
And MM is not dependent on any type of trading methodology. It doesn't
matter what type of system you use. You are simply managing how much to
invest. I don't know what resources you think you need to apply MM to
trading, but lots of people do it who are not millionaires or associated
with huge trading firms. I think all you need is your own intellect and
imagination and some knowledge of the fundamentals. As for the lack of
code submitted by anyone on this board, the reason is that the version of AB
incorporating MM is not available yet. When TJ releases it, I'm certainthat
lots of great code by the many ingenious participants on this forum will
come forth. Meanwhile, you still have available AB's position sizing
algorithm to allow you to start practicing it. That's all. I'm done.>
> Best regards,> > AV :-))> -----
Original Message ----- > From: Herman van den Bergen
> To: amibroker@xxxx > Sent: Saturday,
November 02, 2002 5:27 AM> Subject: RE: [amibroker] Re:
Dynamic Money Management> > > Hello
Mark,> > Thanks for trying to help me. I am just being
practical. I am not saying that MM doesn't work for certain trading
methodologies I just said I that I am making zero progress trying to apply
it to my type of systems and that there is no indication that I would make
progress any time soon even if I spend a lot more time on it. I do not have
resources like some of the large investment companies who have managed
to apply Tharp's MM successfully; my time and resources are limited.>
> If nobody out of a 1000 AB users can crank out some basic
MM code that works than certainly I will not be able to do it either. When
you have some working MM code I'd love to hear from you. :-) My decision
is to wait for others to come forward with more concrete material or for
Tomasz to implement MM in AB. > > MM might well be
another type of unattainable HG for many.> > Best
regards,> > Herman.> > >
> > -----Original Message-----> >
From: MarkF2 [mailto:feierstein@xxxx]> > Sent: 01
November, 2002 12:56 PM> > To:
amibroker@xxxx> > Subject: [amibroker] Re: Dynamic Money
Management> >> >>
> Hi Herman- Not trying to start an argument, but feel compelled
to> > comment because you could not be more
wrong. MM is incredibly> > important and DOES give
rock-solid, tangible results. Also, much of> >
Tharp's book is NOT irrelevant to mechanical traders. It's clear
to> > me that you just don't understand it. I
remember you wrote something> > similar about a
technique in an article by William Eckhardt, one of> >
the greatest traders of all time, because you hadn't taken the time
to> > grasp his concept, either. >
>> > I offer this as constructive criticism and urge
you and anyone else> > who has given up on MM to go
back and study it until you do get it.> > It's not fun
and it's certainly not as sexy as developing new> >
indicators. But, IMHO, it's the boring stuff and the details
most> > people overlook that will make you money
trading. Unfortunately, that> > takes a lotof
time and effort. Thomas Edison once said:
"Opportunity> > is missed by most people because it is
dressed in overalls and looks> > like work."
Think about it.> >> > Best
Regards,> >> >
Mark> >> >> >
--- In amibroker@xxxx, "Herman van den Bergen" <psytek@xxxx>
wrote:> > > Thanks Rick,> >
>> > > Enough time on MM, I stuck it out way too
long. I am going back> > > to my other work where I
am getting more tangible results.> >
>> > > I am disappointed about all the hoopla about
MM (it sounded like> > > the HG of MM) that hasn't
resulted in any practical and> > > verifiable code
whatsoever. Much of Tharp's book deals with> > > issues
that are irrelevant to the true mechanical trader, imho
he> > > is inconsistent in his method and presentation.
He blends the> > > most basic stuff with advanced stuff
which I find very> > > distracting. Book stuffing?But
perhaps I am just not smart> > >
enough> > >> >
>> > > If anybody ever develops some practical afl
code or has a> > > complete an applied case with
tangible results, not just words, I> > > would
appreciate you sharing it.> > >>
> > happy trading,> > >
Herman.> > > -----Original
Message-----> > > From: Rick Parsons
[mailto:RickParsons@xxxx]> > > Sent: 31
October, 2002 10:49 AM> > > To:
amibroker@xxxx> > > Subject: RE:
[amibroker] Re: Dynamic Money Management> >
>> > >> > >
Herman,> > > Your formula listed at the
bottom of the chart may be outdated.> > > Did you
see Al's post on R multiples and how Expectancy changes>
> > as equity changes?> > >>
> > Rick> > >
-----Original Message-----> > >
From: Herman van den Bergen [mailto:psytek@xxxx]> >
> Sent: Thursday, October 31, 2002 1:49
PM> > > To:
amibroker@xxxx> > > Subject:
RE: [amibroker] Re: Dynamic Money Management> >
>> > >> >
> Hi Rick, glad to see somebody else struggle through
this :-)> > > we should compare notes
someday.> > >> >
> I am curious: what is you typical trading system
like, short> > > term (days) or long term
(months)?> > >> >
> Rick, Van Tharp talks about Expectancy as if it
were a stable> > > parameter which is certainly not
the case for short term trading> > > systems (if my
formula is correct). The Expectancy trends vary> > >
very similar to my Equity charts - as expected, so perhaps
both> > > can be used for equal purposes. Van Tharp
does not seem to> > > consider that many systems fade
in and out of performance and> > > that a good trading
composite system would dynamically switch> > > systems
(at best people only seem to switch stocks) to take> >
> advantage of high performance periods for the different
systems.> > >> >
>> > > Expectation = ( 1 +
AveWinTrade/abs(AveLosTrade)) *> > > PercentWinners -
1;> > >> >
> Best regards,> >
> Herman> >
>> > > -----Original
Message-----> > > From: Rick
Parsons [mailto:RickParsons@xxxx]> >
> Sent: 30 October, 2002 7:43 PM>
> > To: amibroker@xxxx> >
> Subject: RE: [amibroker] Re: Dynamic Money
Management> > >> >
>> > >
>>long enough to earn your EXPECTANCY returns<<>
> >> > > I am
in the middle of Tharp's book, Trade Your Way to> > >
Financial Freedom, and just finished the chapter 6 on
Expectancy.> > > The idea of expectancy is an
excellent way to pick the "best"> > >
system.> > >> >
> However if one wants to calculate
Expectancy the way Tharp> > > does, it appearsto
be VERY cumbersome when one has to group> > > trades
into profit ranges then calculate each group separately
to> > > get the overall expectancy number. (See
pages 149 - 158)> > >> >
> So I would imagine if one wants all the
MM and Dynamic> > > Portfolio features, Amibroker
should first calculate expectancy> > > on each
system to make sure we have a positive expectancy
system.> > >> >
> Comments?> >
>> > >
Rick> >
> -----Original
Message-----> >
> From: tchan95014
[mailto:tchan95014@xxxx]> >
> Sent: Wednesday, October
30, 2002 5:02 PM> >
> To:
amibroker@xxxx> >
> Subject: [amibroker] Re:
Dynamic Money Management> > >> >
>> >
> I completely agree with the
quoted message.> > >> >
> TR is flexible enough to
allow for almost any (risk)> > > ideas you
can> >
> think of to do the position
sizing: newrisk, volatility,> > >
margin,> >
> market activities, group
risk, group heat, portfolio risk> > > /
heat...> >
> and yes, the portfolio
level position sizing is the best> > > feature.
You> >
> can even combine different
systems each with different> > > portfolio.
It> > >
is a DOS software but it is powerful.> >
>> >
> Money management (or rather
more accurately, position> > > sizing or
bet> >
> sizing) is an area notvery
often discussed and not often> > >
appreciated.> > >> >
> I have posted some time
ago, you can get some very> > > detailed info
from> >
> TradingRecipes.com as well
as traderclub.com by searching> > > on
"Mark> >
>
Johnson"> > >> >
> This gentleman was kind
enough to post many of the ACTUAL> > > works
he> > >
put in using TR.> >
> 1) He
offered right there a very simple long term> > > trend
following> >
> system that works for
FREE.> >
> 2) He
tested it using 1-contract with the worst> > > possible
fills you> >
> can get>
> > 3)
He test it using regular 1-contract test> >
> 4) He
then tested it using TR with position sizing> > > with
a> > >
portfolio of more than 10 or 15 futures contracts (You> >
> even get the> >
> TR code for FREE too, it is
so easy you can learn by> > > reading it
and> >
> understand the logic behind
it.)> >
> 5) He
tested them over 10 or 20 years of history data.> >
>> >
> It is an
eye opening experience you do not want to> > >
miss.> > >> >
> He also listed his own
trading results from actually> > > following
a> > >
vendor system for 3 or 4 years, most people would agree>
> > it was> >
> excellent
results.> > >> >
> Go to both sites mentioned
above and read as much as you> > > can. If
you> >
> are interested in this
subject, I have not found a better> > > place
for> >
> education. All others only
talk (including Tharp,> > > although I have
to> > >
admit his book is OK), but you see hard numbers here.> >
>> >
> While we are searchingfor
a Holy grail system spending> > > endless
time> >
> there, position sizing
might offer a much easier path> > > because
it> > >
optimizes the profit while controls the risk of your> >
> choice, you know> >
> you can live long enough to
earn your EXPECTANCY returns.> >
>> >
> Wealth Lab is another
software that claimed to have this> > >
capability> >
> but again is never actually
verified to be correct.> > > (There was a
long> >
> debate, discussion andeven
tests on the trader club> > > board about
this> >
> but was never actually
confirmed whether it is working> > >
correctly.)> > >> >
> TR will cost you > $2000
while Athena, last heard, will> > > cost you
>> >
> $40000 (that is right!)
They were originated from the> > > same idea
and> >
> might even be from thesame
group of persons (NOT Tharp> > >
though)> > >> >
> I think, AB even with its
current capability is very> > > close to be
able> >
> to do the portfolio level
position sizing already. (with> > >
this> >
> AddToComposit() for now. Do
not quote me, it just came> > > out of
my> > >
head.) I think Tomasz can do it in a very short time,
the> > > only issue> >
> is to test it. It takes
time to provide all the> > > flexibility and
iron> >
> out all the bugs, it is a
big challenge.> > >> >
> With current AB structure,I
think it has paved ways for> > > much
more> >
> flexibility than TR can
ever provide. Monte Carlo, 2/3D> > > surface
chart> >
> built in, any taker?
;-)> > >> >
> Bob from TR has promised a
window version for years, but> > > nothing
has> >
> come out
yet.> > >> >
>> >
> Thomas>
> >> > >> >
>> >
> --- In amibroker@xxxx,"Al
Venosa" <avcinci@xxxx> wrote:> >
> >
Tomasz:> >
> >>
> > > Yesterday, I
posted a message on Van Tharp's forum> > > about your
plans> >
> > to incorporate
innovative money management and> > >
pyramiding> >
>
techniques> >
> > in a future version of
AB. Below is a response from a> > > user
of> > >
Trading> >
> > Recipes, who claims
that TR is the only software that> > > handles
MM> > >
> corrrectly. Here is what he said:> >
> >>
> > > "It DOES position
sizing. the RIGHT way. I own the> > > program and
it> > >
is> > >
> GREAT. It took me about 5 minutes to get over the
fact> > > that it is> >
> > still a DOS basedapp.
But it's really the ONLY tool> > > that does
it> > >
the> >
> > correct
way.> >
> >>
> > > I talked to
AmiBroker about 6 months ago, and they told> > > me
the same> >
> > thing. Plus once they
do release the program with> > > position
sizing,> >
> it> >
> > still has to be proven
that they have done it right.> >
> >>
> > > There are three
other companies that I know have that> > > have
tried to> >
> > do position sizing.
Two of them got it wrong.> > >
www.rinasystems.com> >
> and>
> > >
www.bhld.com> >
> >>
> > > The third isthe
athena program that is mentioned in> > > Van's book.
I> > >
> haven't ever had the privilege of playing with that>
> > program, but I> >
> > believe I read
somewhere that it used output files from> > >
trade> >
> > station. So, it would
also fall into the category of a> > > program
that> >
> > isn't truely
implementing position sizing at the> > > portfolio
level> >
> like>
> > > Trading Recipes
does."> >
> >>
> > > To explain what
he meant by doing it 'the right way',> > > here is
what> >
> he> >
> >
said:> >
> >>
> > > "TRADING RECIPES'
approach lets you combine trading> > > signals
and> >
> trade>
> > > sizing strategies
into simulations which exactly mimic> > > the way
you> >
> > would trade in real
time. A core feature, which sets it> > > apart
from> >
> > all other "money
management" (or backtesting) software,> > > is
its> >
> > ability to perform
dynamic money management (DMM) and> > > risk
control> >
> at> >
> > the portfolio level.
With DMM, position sizes are> > > determined
with> >
> > full knowledge of
what's going on at the portfolio> > > level at
the> >
> > moment the sizing
decision is made. Just like you do in> > >
reality.> >
> > Other software
packages simply sum individual> > > pre-calculated
equity> >
> > curves. This way,
position sizes are calculated with no> > >
knowledge> >
> of> >
> > what the current
portfolio conditions are at the> > > crucial
moment> >
> when>
> > > a position sizing
decision is to be made. This is not> > > how you
would> >
> > make decisions in
reality and therefore such> > > simulations offer
no> > >
> useful information to the trader. DMM avoids this> >
> pitfall."> >
> >>
> > > TJ, will your
approach be able to do DMM as described> > >
above?> >
> > Personally, I have no
desire to use any program based> > > on DOS.
I> > >
think> >
> > the position sizing
algorithm now included in AB does> > > almost
what> >
> > this guy describes
except for scaling in and out of> > > trades
and> >
> basing>
> > > one's decisions
on the value of the entire portfolio of> > >
multiple> >
> > stocks rather than a
portfolio of one stock.> >
> >>
> > > Al
V.> > >> >
>> > >> >
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